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Shell’s North Sea oil trading draws spotlight again this year

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screen-shot-2016-11-09-at-20-26-36* Shell builds large position in BFOE forward cargoes

* Crude price differentials, Brent market structure weak

* Shell’s Forties sales to Asia in Jan had supported Brent

By Alex Lawler and Amanda Cooper

LONDON, Nov 17 Royal Dutch Shell has snapped up a large volume of North Sea oil that helps set the global Brent benchmark, trade sources said, the second time this year that its trading activities have attracted the glare of the spotlight.

Shell, the world’s second-largest oil company, runs some of Europe’s biggest refineries, including the 404,000-barrels-per-day Pernis facility, and is one of the biggest traders in the North Sea crude market, the home of the Brent benchmark.

The price of dated Brent – the benchmark used to price cargoes in Europe, the Middle East, Africa and parts of Asia, is set by the cheapest of four North Sea crudes – Brent, Forties, Oseberg and Ekofisk, or BFOE.

Shell, trade sources say, has acquired many of the Forties cargoes loading in early December through the forward BFOE market, as well as a large amount of better-quality Ekofisk. Shell already owned a quarter of Forties cargoes loading in December through its equity stakes in the oilfields.

“They have a very dominant position,” said a North Sea trading source at another company. “I expect at some point they are going to sell some of this.”

A Shell spokeswoman declined to comment, citing “commercial reasons”. The company usually does not comment on its trading.

Despite building the position in December-loading cargoes, Shell has been one of the most aggressive sellers in the daily Platts trading window, offering physical barrels of Brent and Forties and often not eliciting buying interest.

In the last six weeks Shell has offered crude for loading via ship-to-ship transfer, usually perceived by traders as signalling an oversupplied market or a seller under pressure, from at least four vessels including a very large crude carrier, or VLCC.

Storing oil on ships, rather than on land, tends to be more expensive and dependent on a number of moving parts, including freight rates and the discount, or contango, in price of prompt-loading barrels to those for delivery in the future.

A steep contango makes floating storage more viable and the first-month Brent futures contract is trading at a discount of almost $1 a barrel to the second month LCOc1-LCOc2 – one of the largest contangoes so far this year.

With a global surplus and North Sea supply perceived as ample, the price differentials of Brent and Forties have been under pressure.

Shell was offering to sell Forties BFO-FOT on Tuesday at dated Brent minus 80 cents a barrel, the lowest differential since December.

HEADING TO FAR EAST?

This is the second time this year that Shell’s North Sea trading position has attracted attention.

In January, Shell bought a large number of Forties cargoes and was expected to ship many of them to South Korea. This coincided with the last time the first-month Brent contract traded at a premium to the second.

It is common for any of the companies that trade North Sea oil, from trading houses such as Glencore, Vitol and Mercuria, to refiners such as Shell, PetroIneos or France’s Total to build big positions in BFOE crudes, which can lead to unusual patterns in related physical and derivative markets.

Glencore bought at least a third of total June BFOE supply.

Plentiful supply and low prices can encourage market players to snap up cargoes cheaply to sell them at a profit at a later date, or ship them to Asia. In Shell’s case, it has the option to simply absorb any unsold crude into its own refining system.

“They can refine Forties, or they may have shorts into the Far East for them,” another North Sea trading source said. “Time will tell.”

(Additional reporting by Ron Bousso; Editing by Dale Hudson)

SOURCE

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